Basel Rules of Banking

Basel is the banking rules agreed by central bankers and regulators from around the world at meeting in BASEL, Switzerland.

Basel I –In 1988, the Basel Committee on Banking Supervision published a set of minimal capital requirements for banks, mainly focused on credit risk, which was enforced in the G-10 countries in 1992.

Basel II – this was designed to create an international standard on banks’ capital requirements.

Basel III – It is the third set of banking rules. Banks will have to raise hundreds of billions of Euros in fresh capital over the next few years. They have to increase their core tier one capital adequacy ratio – a key measure of bank’s financial strength – to 4.5% by 2015.In addition, they will have to carry a further “countercyclical” capital conservation buffer of 2.5% by 2019.

The basis idea is that if banks hold a bigger capital cushion they will be better prepared for another downturn so they can avoid a rerun of the financial crisis. Instead of holding capital equivalent to just 2 % of their risk- bearing assets, banks will have to hold 7% of top-quality capital in reserve.